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The  Theory  of  Inflation 


By 
'^nrey 


•-d 


":■  ,:  .'jiHVWSai' 


.^, 


UNIVERSITY  OFCALIFORNI 

AT   LOS  ANGELES 


^<ruV/^    n  f  >-  ' 


THE  THEORY  OF  INFLATION. 


A  Critical  Exarnimition  of  a  Ruinous  Popular  Fallacy. 

Reprinted  from  the  Philadelphia  Evening  Telegraph  of  November  8,  1873. 

To  the  Editor  of  the  Evening  Telegraph  : — 

More  tliaii  a  century  ago  David  Hume  published  liis  Esmy  on  Honey, 
which  consists  of  a  succession  of  brilliant  but  disjointed  thoughts,  part 
truths,  i)art  fallacies,  so  intermingled,  and  so  plainly  inconsistent  one 
with  anotiier,  that  the  reader  is  at  times  at  a  loss  to  know  whether  the 
author  be  a  believer  in  the  advantages  of  a  constant,  an  increasing,  or  a 
decreasing  volume  of  money  in  any  community  or  country.  However, 
the  so-called  principles,  the  assumed-to-be  truths  of  the  contractionist 
are  derived  from  tliis  very  source,  which  is  the  real  and  original  fountain- 
head  of  this  contractionist's  monetary  philosophy.  This  philosophy  has 
i)ut  little  even  to-day  to  offer  us  which  is  not  drawn  from  Hume,  and  in 
the  main  it  is  but  the  carrying  out  to  its  logical  conclusion  of  a  single 
one  of  his  leading  propositions. 

Senator  Sherman,  for  instance,  deeply  imbued  with  this  one  doctrine, 
hiis  in  an  official  paper  committed  himself  in  the  fullest  manner  to  it  and 
its  consequences,  and  from  him  we  may  learn  to  what  extent  these  conse- 
([uences  go.  In  reference  to  the  reissue  of  the  so-called  "  reserve"  of 
$44,000,000,  Mr.  Sherman,  in  a  report  of  the  Senate  Finance  Commit- 
t;;e,  January,  1S73,  said  that  "the  full  e.xercise  of  such  a  i)ower  would 
undouljtedly  ulVect  the  nominal  value  of  all  i)roperty  in  the  United  States 
to  the  fc.xlent  of  at  least  10  ]ier  cent.,  and  the  real  value  or  burden  as 
between  deblur  and  creditor  at  least  10  per  cent,  on  all  contracts  to  be 
jtcrformed  in  fnturoy  ^ 

liCt  us  now  see  how  this  would  work  in  actiwil  practice.  The  value 
of  all  the  property  in  the  United  Stales  in  1870  was  $:;0,000,000,000, 
so  its  increase  Ijy  10  percent  would  add  to  it  $;{, 000,000, 000.  Can  any 
more  extraordinary  assumption  well  Ite  imagined,  than  that  $44,000,000 
of  currency  should  have  the  power  to  add  to  the  value  oC  the  existing 


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property  of  this  country  $;5, 000,000, 000,  or  over  sixty  eij-Iil  limes  its 
own  volume  ? 

From  wlint  ohservntiou  of  fnets,  nnd  1iy  wlmt  form  mul  nuiuuer  of 
reasoning,  ean  this  conehision  he  iirriveil  at  ?  Why,  firsl  hy  the  gratuitous 
assumi)tion  of  Hume,  that  the  ))riees  of  all  things  in  any  country,  al 
any  and  at  all  times,  are  lixed  as  they  so  stand  in  that  country  "l)y  the 
proportion  between  commodilies  and  money"  in  tliat  country,  and  then, 
further,  by  the  easy  step  that  any  increase  of  money,  witliout  an  increase 
of  commodities,  must  increase  prices  in  exact  proportion. 

But  if  i)rices  depend  solely  upon  "the  proportion  between  commodi- 
ties and  money,"  how  is  it  tiiat  with  but  $750,000,000  of  currency  in 
this  country,  we  find  $30,000,000,000  of  commodities  and  other  pro- 
}ierty  ?  According  to  the  dictum  of  the  school,  we  should  look  for  and 
lind  but  $750,000,000.  It  will  not  do  to  tell  us  that  this  money  circu- 
lates, and  thereby  gives  value  to  $30,000,000,000  of  commodities  and 
other  property.  This  is  not  in  harmony,  I)ut  in  direct  conflict  v\'ilh  the 
teachings  of  the  school.  With  it  money  is,  as  it  were,  but  an  inert, 
lifeless  mass,  possessing  what  may  be  termed  statical,  but  not  dynamical 
qualities — a  mere  yardstick  or  dead-weight,  which  by  its  own  simple 
and  single  length  or  ponderosity,  acts  as  an  inflexible,  unyielding  deter- 
miner of  the  value  of  the  total  mass  of  the  commodities  in  a  country. 
To  tell  ns  that  it  circulates,  and  tlius  has  a  new  power,  a  new  function, 
a  new  office,  is  to  change  the  very  terms  of  the  proposition.  But  even 
if  this  new  factor  be  thus  dragged  in,  it  must  be  on  the  necessary  condi- 
tion that  at  all  times,  and  in  all  places,  and  among  all  peoples,  money 
circulates  at  a  given  and  constant  rate  of  velocity.  There  can  be  no 
possible  escape  from  this  necessity.  Ui)on  which  horn  of  the  dilemma 
then,  will  the  contractionist  hang — that  of  asserting  of  money  that  it 
])0ssesses  no  life-giving  property,  or  that,  while  possessing  such  power, 
that  power  always  and  everywhere  acts  with  equal  force?  One  or  the 
other  he  must  take,  and  each  is  equally  opposed  to  experience  as  well  as 
to  common  sense. 

But,  further,  with  his  inflexilde  effect  of  the  "  proportion  between 
commodities  and  money,"  the  disciple  of  Hume  is  forced  into  the  addi- 
tional and  necessary  logical  position  of  maintaining  that  no  increased 
amount  in  the  production  of  commodities,  by  the  application  of  steam 
and  machinery;  by  the  subjugation  of  new  lands  to  the  control  of  man, 
or  the  improvement  of  the  old  ones;  by  the  discoveries  of  science,  or 
by  the  arts  of  civilization  ;  by  the  increase  of  population  or  of  intelli- 
gence; even  be  the  results  such  as  to  give  a  yield  of  ten,  twenty,  or  fifty  | 
fold,  as  compared  with  that  of  the  past,  ean   add  one  dollar  to  the 


•     »    •   4        •      • 
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SZ5 
3 

aggregate  value  of  those  commodities  unless  accompanied  by  an  increase 
of  currency!  Will  even  our  American  contractionist  seriously  maintain 
a  proposition  so  utterly  absurd,  so  notoriously  false  ? 

Let  us  now  inquire  what  are  the  real  forces  at  work  in  governing 
prices?     They  are — the  quantities  of  the  commodities,  the  cost  of  re- 
production, the  number  of  the  persons  desiring  to  possess  such  commo- 
^  dities,  and  the  means  at  the  command  of  such   persons  towards  such 
-0  possession.     Hence  we  find  that  in  all  countries  almost  exclusively  en- 
«r-   gaged  in  agriculture,  the  prices  of  agricultural  products  and  of  labor  are 
low.     There  being  l)ut  few  persons  not  engaged  in  agriculture,  there  can 
<3C   be  but  a  limited  demand  for  its  products,  and  for  the  same  reason — an 
^    absence  of  a  diversified  industry — there  is  but  a  feeble  societary  life,  and 
but  little  demand  for  labor.     And  here  we  instance  India,  in  which  have 
been  mined  for  perhaps  twenty  centuries,  and  into  which  have  flowed 
from  al)road  for  a  century,  in  a  large  and  of  late  years,  in  an  immense 
volume,  the  precious  metals.     Tliese  phenomena  are  accompanied,  too, 
by  low  prices  for  laljor  and  for  almost  every  native  product.     Here  it  is 
evident  that  the  distribution  of  the  precious  metals  is  so  unequal  that, 
while  vast  in  amount,  these  metals  give  purchasing  power  to  but  few. 
It  is  clear  then  that  in  India,  at  least,  the  great  principle  of  "inflation" 
does  not  work  !     Real  principles  work  uniformly,  each  in  its  own  man- 
ner and  form,  while  false  ones  do  not ;  and  here  is  an  unfailing  touch- 
stone Ijy  which  to  test  the  truth  of  any  and  all  such  claiming  to  be  real 
and  true  ones.     That  of  inflation,  when  thus  tried,  is  found  wanting. 
^        The  cost  of  reproduction   of  manufactured  articles  is  comparatively 
low  in  all  countries  in  which  a  diversified  industry  has  been  developed 
^    to  a  high  degree,  and  in  which  labor-saving  machinery  takes  the  place 
^    of   the    lal)or    of    unaided    Innnan    hands.     Into   such    countries — into 
\^    Germany,  France,  and  Belgium,  for  instance — the  precious  metals  have 
J     for  many  years  flowed  in  one  continuous  stream,  and  have  there  accumu- 
lated, while  labor  has  risen  in  value,  by  reason  of  the  increased  demand 
f(jr  it ;   l)ut  the  prices  of  manufactured   }>rodiicts  have  largely  fallen,  be- 
•  cause  of  the  increasing  jiower  of  steam  and  machinery.      Manufactured 
^^   goods  flow  out  (jf  these  countries,  in  an  ever-increasing  volume,  to  lands 
^  which   have  not  developed  their  industries,  and  in  wiiicli   labor  is  low, 
and  which  export  their  precious  metals.     Surely,  Germany,  France,  and 
IJclgium,  with  their  immense  acquisitions  of  the  jirecious  metals,  and  each 
with  the  addition  of  a  large  circulation  of  notes,  do  not  present  a  single 
fact  going  to  su|>porl  the  theory  of  inflation. 

In  the  numljcr  of  persons   in   a  country  desiring  to   |)ossess,  by  pur- 
chase, commodities  tho  productions  of  their  own  countrymen,  we  have 

403503 


^ 


nil  almost  niicrrinj]^  mcssure  of  tlictlivcrsiGcation  of  cMiiploj'mcntR  in  tliat 
country,  for  tlu>  {greater  the  diUcreiices  the  greater  niitl  the  mure  rapid 
will  be  the  intercourse  and  the  deniaiul  for  sueli  eonunodities.  J)ul  hero 
the  money  question  only  enters  so  far  as  that  money  succeeds  in  cjuickcn- 
injr  societarylife  into  vij;orons  and  healthful  action.  The  function  hero 
exhibited  is  not  that  of  the  mere  yiirdsiick  or  the  pound  weight,  but  is 
closely  analogous  to  that  of  the  blood  that  courses  freely  through  the 
veins  and  arteries  of  the  healthy  animal  organism.  In  such  a  state  we 
have  not  alone  consum})tion,  but  ])rodi'iction,  the  two  constituting  a 
liappy  and  a  hnrmonious  balance  of  forces — nii  exhibition  of  phenomena 
entirely  the  reverse  of  the  discords  so  confidently  held  I)y  the  disciples 
of  Hume.  During  the  late  War  of  the  Rebellion  this  balance  was 
greatly  disturbed  l)y  the  abstraction  of  a  large  number  of  able-bodied 
men  from  production,  and  by  the  enormous  demands  of  the  government 
for  subsistence,  clothing,  and  the  materials  of  war  generally.  From 
this  cause  and  from  excessive  taxation — a  nieiisure,  in  part,  of  the  de- 
mands of  the  government  for  commodities — prices  rapidly  advanced, 
and  yet  the  schoolman  could  see  nothing  in  these  results  but  an  evidence 
of  the  truth  of  his  delusion — inflation. 

Having  seen  that  prices  cannot  be  governed  by  "  the  proportion  be- 
tween commodities  and  money,"  but  that  they  are  largely  dependent 
upou  the  quantities  of  commodities,  the  cost  of  reproduction,  and  the 
number  of  persons  desiring  to  possess  such  conmiodities ;  let  us  now 
inquire  how  the  means  at  tht^  command  of  such  persons  towards  such 
possession  affect  prices  and  how  far  it  is  possible,  by  legislative  enact- 
ment, to  keep  those  means  from  the  possession  and  control  of  the 
people. 

The  general  and  wide  dissemination  of  wealth  among  a  people  must 
exert  a  strong  influence  towards  advancing  prices  among  such  people  so 
far  as  consumption  alone  can  do  it,  by  increasing  the  body  of  con- 
sumers;  -.vhile,  on  the  contrary,  an  equal  amount  of  wealth  concentrated 
in  the  hands  of  a  few  will  exert  less  influence  in  that  direction,  for  the 
reason  that  while  these  favored  ones  may  live  in  luxury,  the  many  may 
liardly  be  able  to  command  the  mere  necessaries  of  life,  and  the  great 
aggregate  of  consumption  be  thus  limited.  These  two  conditions  are 
well  illustrated,  the  first  in  the  United  States,  and  the  last  in  Great 
Britain.  However,  even  the  effect  of  a  large  measure  of  consumption 
is  to  result  in  a  conteracting  one — production,  which  may  and  often 
does  check  any  advance  in  prices. 

Now  let  us  see  how  far  a  State  can,  by  legislative  enactment,  so 
interpose  its  fiat  as  to  succeed  in  preventing  its  people  from  purchasing 


and  consuming,  or  holding  for  speculative  ends,  such  coramodities  as 
they  are  bent  on  having — for  this  is  i-eally  the  question  before  us,  once 
that  we  have  disposed  of  the  theory  that  prices  depend  upon  "  the  pro- 
})ortion  between  commodities  and  money."  Our  illustrations  and  ex- 
amples shall  be  taken  from  Great  Britain.  That  country  has,  for  a 
century  or  more,  in  its  financial  affairs,  been  completely  under  the  con- 
trol of  men  of  the  school  of  Hume,  and  during  the  latter  half  of  this 
period  she  has  maintained  so-called  specie  payments.  There,  where 
every  eflort  has  been  made  to  carry  out  the  system,  may  we  look  for  the 
ripened  fruit  of  it.  In  England  all  notes  under  £5  have  been  interdicted, 
and  it  has  only  been  by  reason  of  her  native  pluck  and  energy  that 
Scotland  has  been  enabled  to  obtain  and  retain  them,  after  more  than 
one  severe  contest. 

A  recent  intelligent  English  writer  on  finance  and  banking  estimates 

The  srold  and  silver  in  circulation  in  Great 

Britain  at £70,000,000     $339,500,000 

The  circulation  of  the  Bunk  of  England,  Oct. 

16,  lb72.  was 34,328,708       166,500,000 

The  notes  in  circulation  in  the  United  King- 
dom, other  than  those  of  the  Bank  of  Kug- 
hind,  September,  1872,  were  as  follows : — 
England,  £.o,057,'J10;  Scotland,  £5,313,560; 
Ireland,  £7,242,081 17,613,551         85.425,000 


Total $591,425,000 

Tlere  we  have  in  less  than  $000,000,000,  the  circulating  medium  ex- 
pressly provided  l»y  the  government  for  its  people,  either  by  its  own 
coinage  or  through  those  institutions  which  it  has  yjermitted  to  issue 
circulating  notes.  But  is  this  medium,  with  its  capacity  for  vital  work, 
a  full  measure  of  the  imrcliasing  jiower  at  the  command  of  the  people 
of  Great  Britain  ?  Has  the  Englishman  Ijcen  content  to  feel  that  here 
are  the  monetary  instruments  placed  at  his  disposal  by  his  Parliament 
and  sovereign,  and  that  with  these  alone  and  none  others  shall  he  work  ? 
By  no  means  ! 

11.  n.  I.  Palgrave,  E^q  ,  a  recent  able  writer  and  slatisticinn,  in  a 
paper  read  before  the  Slalistical  Society  of  Ijondon,  of  which  he  is  a 
member,  declares  u|)on  data  admitted  to  l)e  sound,  that  the  deposits  of 
the  British  l)anks  amount  to  £584,000,000,  or  nearly  $2,900,000,000. 
The  same  writer,  in  his  NoIch  on  JlrmHiif/,  from  a  very  careful  analysis 
of  the  sales  of  stamps  for  l)ills  payable  for  a  series  of  years,  estimates  the 
average  amount  of  l)ills  in  existence  at  any  one  time  in  1870-71  as  fol- 
low.s  : — 


Inland  or  ilomostic  bills  .         .         ,     £210.8r)0.n00 

Foreign  bills  drawn  on  I'.nuliuul     .         .  ;{(), 700,(1(10 


.C-2tl.f>50,000  over  $1,200,000,000 

If,  then,  we  consider  the  extent  to  wliieh  tlic  eredit  system  is  enrried 
in  [)riviite  transndions  in  Knicland,  and  espeeiiilly  the  enorinons  aeconnts 
rnn  np  by  the  nobility  and  <ijentry,  we  shall  have  no  dillienlty  in  arrivinpj 
at  the  conclusion  that  the  amount  of  always  existinj?  debts,  for  which 
no  notes  or  bills  of  exchange  are  given,  is  at  least  ecjual  to  that  of  those 
for  which  they  are  given.     If  this  be  the  case,  we  have: 

i?ank  deposits ii?2,900,000,000 

Bills  of  excliiinjre 1,200,000. ()«(> 

riivate  or  other  debts  for  which  no  bills  are  given      1,200,000,000 


S.>,300,00(),000 


$5,300,000,000  of  purchasing  power — nine  times  the  volume  of  the 
currency  of  the  country — almost  wholly  the  result  of  the  use  of  credit. 
By  the  aid  of  l)ai)k  eliectks  and  clearing  houses,  this  credit  system  is 
maintained  with  the  smallest  possible  allowance  of  bank  notes  and 
specie — Mr.  Palcrave  placing  the  l)ank  reserve  of  all  Great  Britain  as 
low  as  four  (4)  per  cent.,  $110,000,000,  while  the  daily  average  clear- 
ings of  the  London  Clearing  House  alone  are  nearly  $100,000,000. 
The  bank  deposits,  almost  wholly  the  creation  of  the  banks,  through  the 
loan  of  their  credit,  are,  for  all  purposes  of  buying  for  consumption, 
trade,  and  speculation,  as  ellicient  and  as  active  as  circulating  notes. 
The  bills  of  exchange  and  private  debt-charges  lack  the  activity  of  cir- 
culating notes  and  bank  deposits,  but  are  permanent  and  constant  repre- 
sentatives of  the  power  of  purchase,  until  a  crisis  comes  to  contract 
their  volumes. 

If  these,  then,  be  the  results  of  repressive  monetary  legislation  in  the 
home  of  David  Ilume,  and  in  the  land  in  which  his  doctrines  have  so 
long  reigned  supreme,  is  it  not  entirely  evident  that  all  legislative  at- 
tempts to  control  the  trading  and  speculation  of  an  active,  enterprising, 
intelligent,  and  free  people,  Ijy  imposing  an  arbitrary  limit  to  the  amount 
of  their  circulating  medium  are  utterly  futile?  Is  it  not  even  worse  than 
this  ;  for  does  not  such  legislation,  while  depriving  those  people  of  the 
power  to  deal  for  cash,  force  them  to  resort  to  the  various  forms  of  credit 
— at  once  the  forerunner  of  financial  crises  and  the  food  on  which  those 
crises  feed?  But,  further,  does  not  this  particular  system  look  some- 
what like  injlation  run  mad,  and  is  not  the  fact  that  under  it  all 
commodities  are  not  dearer  in  Great  Britain  than  in  every  other  country 


in  the  world  evidence  conclusive  against  the  soundness  of  the  contrac- 
tioiiist's  great  theory  ? 

Let  any  one  for  a  moment  consider  what  would  be  the  practical 
results  to  England  if  its  people  had  permitted  themselves  to  be  limited 
in  their  operations  by  the  $600,000,000  of  circulating  medium  furnished 
to  them  by  or  through  their  government.  The  prosecution  of  her  im- 
mense manufactures  and  foreign  trade  would  be  an  utter  impossibility, 
and  it  would  be  entirely  out  of  her  power  to  negotiate  the  large  loans 
to  foreigners,  which  are  paid  for  by  her  exports  of  manufactured  goods, 
and  the  peTmonent  carrying  of  xvliich  loans  is  only  possible  by  reason 
of  the  Biislence  of  this  large  volume  of  bank  and  other  credits.  Never- 
theless, this  system  of  credit,  which  has  grown  out  of  persistent,  long 
continued,  and  vicious  legislation  in  regard  to  money,  is  top-heavy  and 
essentially  unsound  and  dangerous,  and  liable  to  topple  over  at  any  and 
at  all  times.  During  the  war  of  the  rebellion,  througli  our  ample  supply 
of  currency  and  our  great  business  activity,  we  were  enabled  to  carry 
almost  our  entire  government  indebtedness,  and  it  was  not  until  peace 
came,  and  with  it  contraction  of  that  currency,  that  it  became  necessary 
to  seek  foreign  aid.  Before  that  contraction  commenced  our  people 
were  more  free  from  debt,  in  proportion  to  the  volume  of  business,  than 
at  any  previous  period  in  our  history.'  All  this  is,  alas  !  now  most  sadly 
changed. 

The  circulation  of  the  Bank  of  France,  October,  1873,  was  nearly 
$600,000,000,  and  although  specie  i)ayments  have  been  suspended  since 
Septemljer,  1870,  gold  and  silver  there  circulate  freely,  the  premium 
being  but  about  ^  per  cent.,  and  there  cannot  be  less  than  $700,000,000 
of  those  metals  in  the  country.  The  private  deposits  in  the  bank  were 
less  than  $4f),000,000,  and  business  is  at  all  times  largely  done  for  real 
cash.     In  Germany  a  very  similar  state  of  things  exists. 

Let  Congress,  then,  as  in  duty  bound,  dismiss  from  its  thoughts  at 
once,  and  forever,  any  l)elief  in  the  fallacy  which  Hume  has  given  to  the 
world,  that  prices  are  fixed  "  by  the  proportion  between  commodities  and 
money,"  and  in  the  sad  delusion  that  it  is  in  the  power  of  any  legislative 
body,  in  fixing  an  arbitrary  limit  to  the  circulating  medium  of  a  people 
like  our  own,  or  the  English,  to  put  a  limit  to  their  business  transactions. 
"When  once  they  shall  have  so  far  cleared  their  mental  jjcrceptions,  they 
will  l)e  prepared  to  give  us  a  full  supply  of  national  jHiper  money  having 
the  feature  ofintercha/igeability  {at  the  ojition  of  the  holder)  xcitit  govern- 
ment bonds  bearing  a  fixed  raUi  of  interest.  In  such  interchangeability 
there  is  "u  subtle  principle  that  will  regulate  the  movements  of  finance 
and  commerce  as  accurately  as  the  motion  of  the  btcum-enginc  is  rcgu- 


8 

Inted  I)}'  its  jjovonior,"  and  tliiis  protoct  tlic  people  mid  the  Stiite  IVoin 
tlio  diniijers  incident  td  iill  arliili'inv  enipiiic;il  liniitins^  of  the  cirenhitin}i^ 
iiH'diuni — in  iTtjard  to  llic  re(piisite  vohiinc  oi'  which,  im  a  /*r/07'/ jadfjjniont 
can  enable  any  man  or  Ixxly  of  men  to  decide  npon  and  lix  correctly. 
^Vhen  once  wo  are  freed  from  the  practice  of  such  einpiricisnt,  then  shall 
we  have  tinancial  stability  and  secnrity  against  those  terrible  crises  which 
liave  so  often  visited  (Jreat  i>ritain  and  the  United  States,  the  two  conn- 
tries,  of  all  Christendoni,  the  most  completely  under  the  doininntion  oi' 
the  fallacies  of  iidhition,  and  of  the  power  of  lejjislative  l)odics  to  liunt 
and  control  the  business  operations  of  a  [teople.  Then  shall  we  have 
l>rosperity,  hapi)iness,  and  real  peace,  and  forever  rid  ourselves  of  that 
element  in  our  system  which,  by  creating  panics  and  crises,  is  the  most 
potent  in  making  the  rich  richer  and  the  poor  poorer. 

HENRY  CAREY  BAIRD. 

PuiLADEU'iiu,  November  7,  1873. 


UNiVEHSlTY  OF  CALIFORNIA 

AT 

LOS  ANGELES 

LIBRARY 


UC  SOUTHERN  REGIONAL  LIBRARY  FACILITY 

iiiii  iiii  II  III  III  1 1  III  nil  III  I II II II I 


AA    000  590  449    5 


HG 

525 

B16t 


iJijK 


IMI 


